Blessed by the Potato

Happy Towel Day!

As you know, I’m a fan of Douglas Adams, borrowing the “Don’t Panic” message and putting it in large, friendly letters at the beginning of my book. So it’s only fitting that I do something special for Towel Day.

First off the predictable move: you can get a big Towel Day discount on The Value of Simple by buying through my e-commerce site and using the code TowelDay. Now until Friday only!

But let’s get to something better and more thrilling than that, something more keeping with the spirit of Towel Day. First, a blockquote to remind you of what that spirit is:

“A towel, it says, is about the most massively useful thing an interstellar hitchhiker can have. Partly it has great practical value. You can wrap it around you for warmth as you bound across the cold moons of Jaglan Beta; you can lie on it on the brilliant marble-sanded beaches of Santraginus V, inhaling the heady sea vapours; you can sleep under it beneath the stars which shine so redly on the desert world of Kakrafoon; use it to sail a miniraft down the slow heavy River Moth; wet it for use in hand-to-hand-combat; wrap it round your head to ward off noxious fumes or avoid the gaze of the Ravenous Bugblatter Beast of Traal (a mind-bogglingly stupid animal, it assumes that if you can’t see it, it can’t see you — daft as a brush, but very very ravenous); you can wave your towel in emergencies as a distress signal, and of course dry yourself off with it if it still seems to be clean enough.

More importantly, a towel has immense psychological value. For some reason, if a strag (strag: non-hitch hiker) discovers that a hitch hiker has his towel with him, he will automatically assume that he is also in possession of a toothbrush, face flannel, soap, tin of biscuits, flask, compass, map, ball of string, gnat spray, wet weather gear, space suit etc., etc. Furthermore, the strag will then happily lend the hitch hiker any of these or a dozen other items that the hitch hiker might accidentally have ‘lost’. What the strag will think is that any man who can hitch the length and breadth of the galaxy, rough it, slum it, struggle against terrible odds, win through, and still knows where his towel is is clearly a man to be reckoned with.”
–Douglas Adams, The Hitch Hiker’s Guide to the Galaxy.

It has not been a secret that over the past several months I have been working on an online course to complement The Value of Simple and help people get set up as successful do-it-yourself investors. It was almost a year ago that I posted the first draft of the course outline. Since then I’ve given more library talks, a guest lecture for Ellen Roseman’s UofT course, and had more conversations with experts and potential students on how to better refine the course. Most importantly, I’ve done a lot of reading on delivering an online course effectively, and changed my approach to it.

However what I have not done is finished the bloody thing.

So here is my towel: I have the structure, I have a few modules done and uploaded, I have a history of building and delivering courses and workshops in science and personal finance. If you believe that I have just mislaid the rest of the course you can buy it right now at a huge discount, and help test it and shape its evolution as it comes together.

How big a discount? You can get it for just $49 right now as a Towel Day/pre-order special, roughly¹ 80% off! Why just $49? In part as a tribute: that’s the age Douglas Adams was at his untimely death. And in part because this is early, early access — so early it’s better called a pre-order. However, it will be finished, it will be polished, and if you plan on signing up eventually then doing so now is a great deal. (Note: no coupon code needed, I’ve simply set the price at that level and will raise it for new subscribers as material is added and the course is fleshed out)

Click here to go to the course page and enroll!

1. Roughly because though the final price will likely be $279, I’m very tempted to make the final price $246 because you can even!

There are now a few updates for the Value of Simple on the errata page that have accumulated over the last year and a half since release. Now with some screenshots that need to be changed for the new Questrade system, I’ve decided to take those and roll them in to the e-book version, along with a few other very minor tweaks, which should be going live across all platforms as you read this. If you’ve already purchased the book you may be able to download a new version from your vendor of choice, and if not that’s ok — all the information you need is there in the errata. If you purchased directly from me just let me know and I’ll re-activate your download link within the store software and you can get the new version (but again, this is minor stuff — no need to re-read it if you’ve already put it away).

Updating the print edition is a bit trickier, in part because I really have to increase the price at the same time — the crash in the Canadian dollar does not play well with printing costs in USD (at this point the book is just a hair over break-even). Also because versioning is a bit more rigid in print: a second edition gets a new ISBN to track it, though there is some grey area around what constitutes a second edition. Minor corrections can be made without a new ISBN as part of a second printing without updating all that metadata. I really don’t want to release a 2nd edition over a few minor corrections, but I don’t want to let the e-book version get ahead of the print (even if everyone up until today had to get these changes through the errata page). Finally, updating print is trickier because (even with print-on-demand technology) there’s inventory. So even if I uploaded new files tonight, it may take a while for a new print run to hit the shelves. For now I have not pushed through an update to the print edition, but likely will soon (I just need more free time to make it happen).

So that is to say: if you want the print version, grab it while you can still get it for under $17 (based on the change in the exchange rate, the CAD price on a new print run will need to go up to near $20). As always, the e-book is natively priced in CAD.

Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) are great ways to let your investments grow tax-free — with the added benefit of making your paperwork simpler because you won’t have to track or report the gains of individual investments within them. Deciding which is best for you can be a bit complicated, so this decision tool should help you quickly figure out which to use, with some additional discussion below. Click here or on the preview image to open the PDF.

TFSA: The TFSA is a very flexible tax shelter, and also very straightforward. Everyone over 18 gets the same amount of contribution room each year. You put in money that you’ve already paid income tax on (“after-tax contributions”), your investments grow tax-free, and there’s no tax paid on withdrawals. What really makes the TFSA flexible though is that you can add back any withdrawals you make to your next year’s contribution room, so if you find you need access to your funds it’s easy to get at them and then catch up on your savings and get back on track later.

RRSP: The RRSP is a bit more complicated. It also shelters your investments from tax as they grow, but starts with pre-tax money (you get a deduction for contributions), with the withdrawals eventually added to your taxable income. If your tax rates when you contribute and withdraw are the same, the benefit is the same as that of a TFSA, and if you can withdraw at a lower effective tax rate than when you contribute, the RRSP can provide a bonus benefit on top of the tax-free compounding — but predicting if those tax rates will be different (and whether that will be beneficial to you) can be a bit tricky. Everyone has their own RRSP contribution amount, based on how much was made in the previous year along with adjustments for participating in pension plans. While we tend to think of the RRSP as an account strictly for retirement, there are programs for making withdrawals (loans) from your RRSP to buy a house or go back to school (the Home Buyer’s Plan [HBP] and Lifelong Learning Plan [LLP]). You can also make a withdrawal at any time for any reason, but will have to add that amount to your taxable income — and you won’t get the contribution room back.

Both: Both can hold a wide variety of investments, from savings accounts and GICs to mutual funds to stocks and exchange-traded funds. Both shelter your investments from taxes (and the associated reporting/tracking requirements). In all cases, if you have the room holding your investments in a TFSA will be better than non-registered (taxable) account. In most cases an RRSP will also be better than a taxable account, but when the taxes at withdrawal will be much higher than those at contribution (high enough to outweigh the benefit tax-free compounding), a non-registered account may be preferable. For example, if you expect to withdraw from an RRSP in retirement where it will cause GIS claw-backs, you may be better off with a non-registered account if your TFSA is full. Likewise, if you’ll need near-term access to your funds, a non-registered account or TFSA may be better than an RRSP.

If you don’t have money to contribute now, both the RRSP and TFSA let you carry your contribution room forward until you can use it.

So to help you decide between these two good options, here are some considerations, in order:

1. Default Option

The TFSA is flexible and easier to use, so if you don’t have the time to figure it out exactly, or lack some information on your current and future tax situation to optimize, go with the TFSA — you can always withdraw from your TFSA and switch to an RRSP later. The is also a good default option because the TFSA tends to be better for people with less money, but those in situations where they might prefer the RRSP (through the other steps below) will often have enough more than enough money to max out the TFSA, so starting with the TFSA will still lead to having investments in both.

2. Emergency Access

Any money you’ll need in an emergency has to be accessible. Have a cash emergency fund, and if you fill your TFSA keep that emergency fund in a non-registered (regular) savings account. But also consider keeping some of your long-term savings accessible in your TFSA, just in case you need more than your cash emergency fund. If you have to sell and withdraw some investments, there will be a lot fewer complications and you’ll get the room back if they’re in a TFSA. If everything is locked up in an RRSP it can add more stress to an already-stressful situation. So if you’re just starting out with your long-term savings, it can make sense to start in the TFSA regardless of other considerations just in case your planning for the long term was off or something unexpected comes up.

3. Free Money

Always take free money when offered. If your employer matches your RRSP contributions, sign up for that program, as that benefit will almost certainly outweigh any other advantage a TFSA might hold.

In some cases this may also point you towards making RESP contributions a priority, but that’s getting beyond the scope of this guide.

4. Behaviour

RRSPs can only beat TFSAs if you’re making RRSP contributions pre-tax. That means that you’re contributing the refund too, or having your contributions come straight off your paycheque with the tax withheld reduced — either way, you have to put more in the RRSP in the first place for it to equal out. Though more dollars go in, because it’s pre-tax it has the same effect on your after-tax spending dollars. If you would contribute the same amount you’ve saved up at the end of the year in either case and then fritter away your refund in the spring, go straight to the TFSA.

However, behaviour can also point you in the other direction: if you need your funds to be as locked up as possible to protect you from yourself in a weak moment, you may prefer the RRSP over the TFSA.

5. Low Income

If you’re lower income (less than about $40k/yr — in the lowest tax bracket), then look towards the TFSA. In particular if you may be eligible for GIS in retirement, the claw-backs from RRSP withdrawals will be a big disadvantage, and the TFSA will be better for you. Remember that claw-backs of these programs is part of your overall effective tax rate to consider when looking at the RRSP’s tax arbitrage ability.

6. Special Situations

Buying a house? The RRSP HBP lets you use pre-tax money for your down-payment, which cam help you avoid CMHC fees. If you already have more than enough saved up to put 20+% down no matter which tax shelter you use, then you may not care, and may even prefer the flexibility of the TFSA. But if you’re just under that mark, being able to put pre-tax money (i.e. your savings plus a refund) in an RRSP and then withdraw all of that (including the government’s portion) can help get you over the line and save a lot on CMHC fees.

Another special situation that might favour the RRSP is a gap in earnings, such as going back to school or an upcoming mat/pat leave. Having significantly lower earnings in a year may let you use tax arbitrage early, though you won’t get the contribution room back. Keep in mind that your taxable income is calculated by calendar year, so a leave starting or ending partway through the year may not bring your earnings down far enough for this move to be advantageous.

7. Tax Arbitrage

Most comparisons skip straight to this step, but it’s important to understand that the above factors can be more important than the math. However if there are no over-riding factors influencing the decision, then the RRSP will be better than a TFSA for people who have a lower effective tax rate when withdrawing (usually that’s in retirement) than in their contribution years. The TFSA will be better in the opposite case, where the tax rate is lower in the contribution years. Note that the withdrawals may move you up through several tax brackets if a large part of your retirement earnings come from your RRSP, so the average benefit may be there even if the last few marginal dollars are in the same brackets. Don’t forget the effect of clawbacks on government benefits (like GIS and OAS). Predicting your future tax rates (and how they compare to where you’re at now) can be a tough exercise given all the uncertainties of the future (not only your own earnings situation and the performance of your investments, but changes to the tax rates themselves by future governments), so this may be one to work through with the help of your planner.

Many people will end up using both accounts to an extent.

I’d like to thank Sandi, Dan, and Wayfare for feedback on early versions of the tool.

The anniversary of the release of The Value of Simple is tomorrow, and I’m excited to say that it has just rolled past 1000 sales!

I honestly didn’t think it would hit that point and hadn’t written anything ahead of time, so in brief: hurray! I can’t believe it’s come this far, especially given how much I suck at marketing. I love seeing all those positive reviews and people referring it to their friends, and that even after a few months it’s still fully checked out at the various library systems that have it across the country, with a backlog of holds in Toronto and Vancouver!

In the meantime, I’ve been working on something that I knew would take forever and is taking even longer — I thought maybe if I pulled a few all-nighters I could get it out for the close of Financial Literacy Month (today), and now I see it’s going so slow I may have to re-think the whole idea.

Speaking of Financial Literacy Month: hey, if you’ve just learned how to budget and save your money, why not check out The Value of Simple, a really easy-to-use guide that will help you take the next step to investing that money you’re now saving?

And speaking of holidays, it also makes a great gift. So many people out there could use a little more financial literacy and investing how-to, but may not even know to look for it themselves. And it’s slightly more exciting than socks (there’s a bunny in it!). If you’re just looking to pick up a copy for a gift then there are lots of ways to do that. Both Amazon and Indigo have been discounting it online (if you buy enough other things to qualify for free shipping, it’s actually cheaper for you than buying from me directly), so that may be the way to go as long as those price cuts hold. If you want a signed copy though you’ll have to order directly from me. The last day to order and expect Canada Post regular delivery* in time for xmas is December 16 (December 17 for Ontario addresses) — the retailers will have their own shipping cut-off deadlines.

* – XPressPost cut-off would be Dec 21, but that will cost $17 extra — more than the book itself!

First off, I had two recent podcast appearances:

Over at Because Money, we talked about who should be a do-it-yourself investor, related to this post. Interestingly, after we recorded this we got to hear more about the importance of behaviour at the Canadian Personal Finance Conference, where the final talk by Dan Bortolotti indicated that because of self-defeating behaviour he doesn’t think many investors should be do-it-yourselfers. I tried to emphasize behaviour and processes in the book to make sure that people didn’t fall into those traps, and I plan to focus my efforts for the rest of the year on solving that problem so that more DIYers will be successful.

Then, I was on the Mo’ Money Podcast, talking about the book and my history with money.

If this is your first time finding out about the book, or if you have someone you think should pick up a copy to learn about investing, then be sure to head on over to Amazon — it’s on sale at the moment for an incredible price. I’m not sure if it’s a financial literacy month thing (aka “November”), or if it’s a flash sale that will be over tomorrow.

I also want to excitedly say that my October sales numbers are in and the Value of Simple now sits at 956 sales. It’s totally feasible to get 44 sales in November (the financial literacy-est month of the year!) to manage to roll over 1000 the sales mark by the 1-year anniversary of the book’s release in December! Totally feasible with your help that is. Remember that most people you know and love likely don’t know anything about investing or a lot of other financial topics — Kyle called it the “Canadian emperor has no clothes” phenomenon in the podcast, where everyone assumes everyone else has this all figured out and doesn’t want to talk about it. So be sure to whisper it in their ear, or send them a link to buy the book (or at least check out the reading guide), or just buy a copy for them now for Christmas to help me reach my completely arbitrary goal!

Finally, if you’re interested in a bulk order (for instance if you want to get your clients or employees something awesome and educational for the holidays), the printer has reminded me of the various ordering cut-offs for shipping in time for Christmas, as well as an extra discount for orders (over 10) placed before Nov 22. Contact me for details about bulk orders.